Owner-brand pain more acute amid Middle East oversupply
Owner-brand pain more acute amid Middle East oversupply
07 FEBRUARY 2019 9:14 AM

The relationship between brands and owners inevitably gets tested during times of oversupply and dampened performance metrics, but in the Middle East, hoteliers are facing their first real test as markets in the region begin to tighten.

ABU DHABI, United Arab Emirates—As the struggle to grow average daily rate amid a backdrop of oversupply in the Middle East intensifies, conversations between owners and operators are turning to which dynamics add the greatest value, according to sources.

The sentiment during a panel at The Gulf & Indian Ocean Hotel Investors’ Summit titled “Do bigger brands make for richer owners?” was short-term pain is dominating the argument as owners look for the best models and partners to flourish in this period of regional transition.

One palpable, overriding perspective is that operators are not the flavor of the month in the region.

“Bigger brands make richer brands,” said Olivier Harnisch, CEO of Dubai-based Emaar Hospitality Group. “For the last 20 years, brands have done very well in bringing in guests, but in terms of distribution now, the internet has changed the balance, and the owners are paying for that.

“When it comes to management, I think there is a conflict of interest. (Hotel management agreements) drive brands to maximize revenue, not the bottom line. Brands are genuinely interested in doing a good job by their owners, but this is difficult to bridge … and I have been a GM of branded hotels.”

Considerations of scale
Other owners on the panel also pointed to disadvantages of working with the bigger brands.

“Smaller brands are far more agile and customer-centric and thus more able to drive cash. For example, a Turkish company able to come into the UAE and bring in a niche customer that is sustainable,” said Yannis Anagnostakis, CEO of RAK Hospitality Holding. The hotels division of emirate Ras al Khaimah’s sovereign wealth fund owns such properties as the Ritz-Carlton Ras al Khaimah Al Wadi Desert and Rixos Bab al Bahr.

Giuliano Gasparini, SVP of asset management and acquisitions, hotels and leisure at Aldar Properties PJSC, added that “smaller operators have a far better alignment of interest” in terms of gross operating profit.

“We look at asset value, and different types of contract affect this,” he said. “We see the larger chains getting more rigid. Of course, it depends on what the strategy of the asset is, and what the location’s demand is.”

But Luca Bandecchi, vice chairman of the hospitality committee at SBK Holding, which owns four Fairmont Hotels & Resorts assets in the UAE, said branded hotel chains often dominate the best locations, which drives performance and the bottom line.

He said the continued economies of scale from consolidation should result in synergies and, as a consequence, lower fees.

“In terms of purchasing power, yes, the brands should come through for us,” Bandecchi said. “For other fees, it is up to (owners) to dig.”

Gasparini said the larger chains could do everyone a service by increasing transparency, though he acknowledged great strides have been made. Anagnostakis, however, said the Middle East has yet to see benefits from brand consolidation.

“There has not been yet a measurable or significant benefit from these mergers and consolidation,” Anagnostakis said.

Amid the current disquiet in Middle Eastern hospitality, Harnisch said both sides need to do more homework to make sure there are common objectives.

Shifts in the industry
Harnisch said there might be a move away from hotels having sizable event space, which he added might not be so good for brands.

Emaar recently sold five of its hotels, including the Address Dubai Mall, to sovereign wealth fund Abu Dhabi National Hotels for 2.2 billion Emirati dirhams ($599 million). Emaar will continue managing the assets, Harnisch said.

This move to becoming more asset-light might result in some tweaking of agreements, such as incentive fee-only HMAs, Harnisch said.

“We’re still looking for that perfect agreement,” he added.

Another emerging trend sees retail luxury firms moving into hospitality, which panelists said will provide the niche traveler that hopefully will allow some properties to bypass the problems of oversupply.

Emaar operates both Armani Hotels assets, one of which is in Dubai in Burj Khalifa, the world’s tallest skyscraper. The biggest share of market for Emaar’s Armani hotels is Chinese guests, “who would not come to these hotels if Armani was not written above the hotel,” Harnisch said.

Anagnostakis said he’s excited to see what comes next for Belmond, which was acquired in December 2018 by French luxury retail firm LVMH Moët Hennessy Louis Vuitton SE.

“This is another wake-up moment, perhaps the second wave of hotel branding,” he said. “Not so long ago it was impossible for hotel operators to create agreements with luxury retail.”

The panelists said the industry is watching Marriott International to see how its scale affects its relationships with the online travel agencies.

Even if Marriott is able to secure lower commissions, the panelists expect owners will see those reduced fees offset by other brand charges.

“The large brands might get OTA commissions down, but then they’ll just charge owners seamless connection fees. … They want you to focus on the big, nice message,” Gasparini said.

“There still exists very little leverage,” Harnisch added. “Are brand campaigns to go direct a success or not? And anyway, the owners pay for those campaigns through discounted rates.”

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